Fed Selections Are Early Test For Bush, Kemp

July 07, 1985|By Bill Neikirk, Chicago Tribune.

WASHINGTON — The battle between Vice President George Bush and Rep. Jack Kemp (R., N.Y.) for the heart and soul of the Republican Party already is upon us. One of the first skirmishes will be over two appointments to the Federal Reserve Board.

The more conservative Kemp wing of the party, with its emphasis on easier monetary growth and versions of the gold standard, is campaigning for Reagan to name two people more sympathetic to the cause of supply-side economics.

Treasury Secretary James A. Baker III, a Bush ally and a voice of caution and moderation within the administration, is expected to resist such pleas and recommend two candidates with more traditional, mainstream views on economics. With a prominent surrogate such as Baker wielding the sword for him, Bush doesn`t have to interject himself directly.

The two vacancies are occurring because Fed member Lyle Gramley is resigning for personal reasons and because the term of Charles Partee expires early next year. Reagan already has appointed two Fed governors--Vice Chairman Preston B. Martin and Martha Seger--and both have argued for more aggressive monetary easing. Neither, it is fair to say, has impressed the economics profession, or Wall Street for that matter.

Gramley and Partee are two of the board`s most influential members because of their knowledge and intellect. To replace them with dilettantes, said economist Allen Sinai of Shearson Lehman Bros. Inc., would ``be viewed negatively by market people. . . . The Federal Reserve isn`t a place for doctrines or religion. It`s a place for cool-headed reason.``

Although Kemp couldn`t be reached for comment, one of his supply-side advisers, Alan Reynolds, economist at Polyconomics Inc., said the two appointments ``provide an opportunity to introduce some diversity of approach and analysis into the making of monetary policy. It has been a rather closed club for some time.``

Reynolds said that although the Kemp wing might not wind up with one of its candidates on the board, it might succeed in preventing Reagan from appointing someone who would continue what he views as the Fed`s overly tight monetary policy. This comment is a measure of the supply-side complaint; most economists believe that the Fed has eased money substantially.

Inside the administration, economic officials brand the Kemp wing as too much on the fringe and unacceptable to the markets and to Main Street. Although Reagan himself feels some kinship with their views, his advisers are worried about the uproar that they believe would spring up if Reagan boldly appointed two supply-siders.

There`s another feeling, too, that Kemp hasn`t been all that loyal to Reagan`s economic program, blasting it every time it appeared that the President was straying the slightest bit from the purist line. One aide said that bowing to Kemp`s wishes in an effort to co-opt him doesn`t work. It is like ``throwing raw meat to the wolves,`` the aide said.

Andrew Brimmer, himself a former Fed member and now an economic consultant here, said he doubted that Reagan would yield to the pleas of the supply-siders. But he added that Reagan might feel compelled to select someone other than an economist. Currently, all seven members are economists and six of the seven at some point in their careers served on the Fed staff before becoming members. They are insiders through and through.

As a compromise, Reagan might pick two candidates with a ``broader feel,`` perhaps from some of the larger regional banks, Brimmer said.

Some market analysts fear that Reagan may appoint clones of Martin and Seger and retrigger fears of inflation. The fear of inflation is something to fear in itself, because it drives up long-term interest rates. For that reason, Reagan--if he thinks about it enough--will probably find it in his own self-interest to choose a recognized professional with mainstream economic views.

Another reason is that two allies of Martin and Seger on the board could force some big changes in monetary policy against Chairman Paul A. Volcker`s wishes. Volcker, highly respected internationally, would probably resign, an act which alone could lower the value of the dollar.

A FORM OF ECONOMIC COMPETITION

Former Treasury Secretary Donald T. Regan, now White House chief of staff, is one of the best trench fighters around. A friendly rivalry has developed between Regan and Baker, his successor at Treasury and chief economic spokesman.

Regan, though, is encouraging Beryl Sprinkel, newly appointed chairman of the Council of Economic Advisers, to speak out publicly so as to provide some competition for Baker.

Regan also plans to bring Dennis Thomas, a former White House and Treasury lobbyist who resigned recently, back into the White House to serve as a buffer between warring elements in the administration.

Now more confident in his own position, Regan will try to extend his influence. Look for clashes with Baker and his aide, Richard Darman, in the fall.